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Aim and ObjectivesWe would be looking at the IMF’s blunders in thefollowing aspects/situations :1. Its support of Dictatorship regimes2. Its role in Neocolonialism3. Its involvement in the Argentina crisis (1991- 2002)4. The East Asian Crisis5. Housing Bubble Crisis In the end we will try to see what reforms are necessary in the IMF’s functioning.
International Monetary Fund• The International Monetary Fund (IMF) is an organization of 187 countries, working to:• Foster global monetary cooperation• Facilitate international trade• Promote high employment and sustainable economic growth• Reduce poverty around the world.
History• IMF was conceived in July 1944 at the Bretton Woods conference• It came into existence on 29th December 1945.• Objective - stabilize exchange rates and assist the reconstruction of the worlds international payment system.
IMF-Basis For Lending• Nations with severe budget deficits, rampant inflation, strict price controls, or significantly over- valued or under-valued currencies run the risk of facing balance of payment crises. Such member states may request loans• In return, countries are usually required to launch certain reforms, which have often been dubbed the "Washington Consensus".• These reforms are thought to be beneficial to countries with fixed exchange rate policies that may engage in fiscal, monetary, and political practices which may lead to the crisis itself.• Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.
Uncle Sam’s Dominance• Major decisions require an 85% supermajority• The United States has always been the only country able to block a supermajority on its own.• With a quota of 17.09% the United States can veto any major decision.
What happened• According to IMF principles it shall not interfere in the political affairs of any member; nor shall they be influenced in their decisions by the political character of the member concerned.• Only economic considerations shall be relevant to their decisions.• The IMF has repeatedly contravened this policy. In truth, it has made many choices based on political considerations.• The IMF has often lent money to the authorities in countries despite the dismal quality of their economic policies and a great degree of corruption: Indonesia and Zaire are two cases in point
Downside• It shows IMF is generally apathetic or hostile to their views of human rights, and labour rights.• In case of dictatorship regimes most of the money goes into making a group of persons faboulously rich while the rest of nation is grappling with poverty.• In case of military regimes most of the money is spent on purchasing military equipment and virtually no amount is used for the intended purposes.
Reasons• The examples given in this study show that political and strategic interests of major capitalist powers are determining factors.• Regimes with the backing of major capitalist powers have received financial aid even though their economic policies did not meet official International Financial Institution (IFI) criteria or they failed to respect human rights.
What it means?• It is defined as the control of a developed country or International bodies (such as the IMF or World Bank) over developing countries through economic pressures. A kind of Modern day Imperialism.• It is usually practised in the premise of aid to the poorer crisis ridden countries in the form of money or goods in return for control over their economic policies and other domestic affairs which in turn prove advantageous to the stronger developed countries
IMF’s role in Neocolonialism• The choice to grant or to refuse granting loans, especially by international financial institutions such as the IMF, WB and other powerful countries, is perceived as a decisive form of control over Third World countries.• In order to qualify for these loans, and other forms of economic aid, weaker nations are forced to take certain steps favourable to the financial interests of the IMF and World Bank but detrimental to their own economies. These structural adjustments have the effect of increasing rather than alleviating poverty within the nation.• In the end, the loans pile up so much that it becomes impossible for the countries to ever pay back the debt. Many African countries still have their annual debt greater than their annual loan.
No wonder they’re unpopular there…. Similar banner from Zimbabwe Protests against the World Bank
For Example……• 1991 to 1993, Kenya had its worst economic performance since independence :a) GDP stagnatedb) Inflation increased – 100%c) Budget deficit reached about 10% of GDP• The reason for this meltdown was partly due to the Goldenberg crisis –where millions of shillings were siphoned off the country through illegalmeans.•This was again a consequence of Kenya implementing the IMF’srecommendations and opening up its economy to encourage free trade.To renew its economy, it needed funds from the IMF and the World Bank –but they came at a price. The IMF put conditions on Kenya’s economy inreturn for the loan – like the lifting of trade barriers on importedagricultural staples among other things.
End effects• This led to heavy dumping of the US/EU grain surpluses onto the local market spearheading local agricultural producers into bankruptcy.• Apart from Kenya, Zimbabwe and Malawi were also heavily affected as they were once self-sufficient grain producing countries until 1990 when the IMF ordered dumping of EU/USA grain surpluses, precipitating local farmers to bankruptcy.• Tightly regulated and controlled by the international agro-business, this oversupply ultimately leads to stagnation of both production and consumption of essential food staples and the impoverishment of farmers throughout the world.
In a nutshell….• ‘The time has come to end this charade. Africa should say: thank you very much but we need this money to meet the needs of children who are dying right now so we will put the debt servicing payments into urgent social investment in health, education, drinking water, control of AIDS and other needs.(Professor Jeffrey Sachs, Director of The Earth Instituteat Columbia University and Special Economic Advisor toex-UN Secretary General Kofi Annan).
What happened?1. Argentina was plunged into a devastating economic crisis in December 2001/January 2002, when a partial deposit freeze, a partial default on public debt, and an abandonment of the fixed exchange rate led to a major collapse in the output and high levels of unemployment leading to political and social turmoil.2. This has raised questions regarding the country’s relationship with the IMF because they happened while its economic policies were under the close scrutiny of an IMF-supported program.3. Furthermore, the IMF had been almost continuously engaged in Argentina since 1991, when the “Convertibility Plan” fixed the Argentine peso at parity with the U.S. dollar in a currency board-like arrangement. While Argentina experienced strong growth and very low inflation for much of the 1990s.
What the IMF did?1. IMF backed the “Convertibility Plan” of Argentina by providing it with various aids It arranged massive amounts of loans -- including $40 billion a year ago -- to support the Argentine peso.2. The IMF also provided extensive technical assistance (TA) during the period, dispatching some 50 missions between 1991 and 2002, mainly in the fiscal, monetary and banking areas.3. Argentina being a member nation of IMF, had to agree to its policy of free trade. With peso at par with the dollar, people could buy virtually everything they could have thought of. Thus, foreign exchange reserve drastically decreased and the local companies and factories couldn’t survive the invasion foreign superior goods. All this led to unemployment in Argentina.
Culmination1. It became clear that they could hardly pay back the loans granted by IMF and under such a chaos, government changed its policy from fixed exchange rate to floating exchange rate. The outcome of the change was that the value of peso deteriorated from 1$=1 peso to 1$=3.18peso.2. Almost every company in Argentina dealt its transaction in dollars. With the loans taken in dollars it had to repay them in dollars.For Example:A company having a debt of 1000$ would have had to pay it backwith 1000 peso, but with the new exchange rate it had to payalmost three times as much.3. With this bleak scenario, Argentina was declared Bankrupt in in December 2001.
Questions to ponder• Why did IMF back the “Convertibility Plan”?• Why IMF provided Argentina with too much financing without requiring sufficient policy adjustment?In either case, the eventual collapse of the convertibilityregime and the associated adverse economic and socialconsequences for the country has, rightly or wrongly, had areputational cost for the IMF.
Why It Happened• Flood of short-term capital.• The regional economies experienced high growth rates of nearly 8–12% GDP.• But in the late 90’s these countries had large private current account deficits due to overinvestment of money in real estate and other unnecessary ventures.
Contd..• Many southeast countries came under speculative attack.• When it became apparent that private enterprises in these nations would not be able to meet their payment obligations, international currency markets panicked.• Currency traders sought to convert their Asian money into dollars, and the Asian currencies plummeted.
IMF’s Role• IMF asked the governments of the affected nations to reduce their expenditure and to implement tighter monetary policies .• This proved to be a disaster as the governments in these countries were not running budget deficits unlike the Latin American countries involved in the 80’s crisis.• IMF was also not able to properly roll over short- term loans to long-term loans which was much needed.
Contd..• All these conditions worsened the economic breakdown.• They suffered permanent currency devaluations, massive numbers of bankruptcies, and collapses of whole sectors of once-booming economies.• As the crisis spread to other East Asian nations-- and even as evidence of the policys failure mounted--the IMF barely blinked, delivering the same medicine to each ailing nation that showed up on its doorstep.• Malaysia’s relatively faster recovery.
Adverse Effects• South Korea, Indonesia and Thailand were the countries most affected by the crisis.• The economic crisis also led to a political upheaval in these countries.• There was a general rise in anti-Western sentiment, with the IMF in particular singled out as target of criticism.
Housing Bubble CrisisIMF’s role1. IMF did not take predict the Recession.2. IMF lending policies were procyclical during the Recession.
Prediction of Recession• Dean Baker recognized the Housing Bubble in 2002 in his “The Run-up in Home Prices: Is It Real or Is It Another Bubble?”• Nouriel Roubini made two infamous speeches in September 2006 in Washington D.C. predicting the impact of the bursting of the Housing Bubble, which earned him the title “Dr. Doom”.• The World Economic Outlook made no mention of the Housing Bubble till the Bubble actually burst.
What did IMF do, while the Bubble grew?IMF defense:• The Housing Bubble was growing in USA• USA has refused to be subject to the Financial Sector Assessment Program (FSAP), which is IMF’s main supervisory instrument.• How do you expect IMF to predict anything on the basis of something that it cannot monitor?
Fair Point. But isn’t it too desperate a defense?• The publications and public speeches of various economists from 2002 to 2006 should have been enough indication. AND• Should USA be allowed to refuse subjection to FSAP?
Lending Policy during the Recession • The lending policy for some low-income nations has actually proven to be procyclical, i.e. they are magnifying the economic and financial fluctuations in these countries. • Many European nations, (like Greece, Latvia, Hungary, Ireland, etc.) have gone on record to say that IMF policies have actually exacerbated the crises in their countries.* • These countries are facing a situation similar to the that of Argentina in 2001.*Center for International Finance & Development, The University of Iowa College of Law,The IMF faces post-crisis criticism.
Latvia’s World RecordSource: Mark Weisbrot and Rebecca Ray, Latvia’s Recession: The Cost ofAdjustment With An “Internal Devaluation”, February 2010
Where the problem lies…• Latvia has been trapped in a recession in which all of the major macroeconomic policies – the exchange rate, fiscal policy, monetary policy – are either going in the wrong direction or cannot be utilized to help stimulate the economy.• The problem with pursuing these policies is that they are attempting to recover from the recession by means of an internal devaluation. This means that the economy must contract and unemployment rise sufficiently in order to push down wages and other costs to the point where there is significant devaluation, while keeping the nominal exchange rate fixed.
Apprehensions…• So far, none of the countries that have attempted to do this have succeeded in moving the real effective exchange rate very much.• It is also not clear whether this strategy will succeed in the long run. We may see a prolonged period of slow growth and high unemployment and even a relapse into recession – as may be happening now in Ireland, Romania and possibly in Spain.• Greece, which has been subjected to the most severe fiscal tightening, has had negative growth for seven consecutive quarters.
Over-Optimistic PredictionsSource: Mark Weisbrot and Juan Montecino, The IMF and Economic Recovery: IsFund Policy Contributing to Downside Risks?, October 2010.
The Final Word• The lending policy for low-income nations, formulated on the basis of over- optimistic estimations, has sent them down a procyclical downward spiral, the ends of which cannot be predicted so easily.
Conclusions1. IMF should rectify its “one size fits all” mentality.2. The monopoly of the United States in the affairs of IMF needs to be reduced3. Developing countries need to be given a greater say.
References• www.wikipedia.org• www.imf.org• www.cepr.net• www.sunsonline.org• Google Images